Tough Lessons Fuel the Rise of Hybrid Variable Annuities

Life and annuity insurers, with memories still fresh about promises they struggled to keep, don’t want to make the same mistakes twice.

More than a decade ago, insurers sold variable annuities with generous promises policyholders couldn’t refuse.

But when interest rates collapsed after the financial crisis, companies were on the hook for contracts paying 8 percent, often more, in a plummeting rate environment.

Since then, insurers have adjusted by whittling away at the benefits that came with variable annuities, imposing variable annuity investment restrictions on advisors, and sticking to their “derisking” strategies.

In short, even with interest rates worlds apart from where they stood in 2007, companies aren’t taking any chances.

Enter the structured, or buffered, variable annuity, a hybrid between a traditional variable annuity and an indexed annuity.

Advantageous Structures, but for Whom?

Using options contracts, hybrid annuities are structured so that insurers absorb market losses, but only up to a threshold.

If the market drops 50 percent, for example, or well over that threshold, the investor’s principal is at significant risk.

In exchange for investors taking on exposure, hybrid variable annuities offer caps higher than what they would get with an indexed annuity.

From the perspective of the insurer, structured variable annuities represent a new generation of “capital-efficient” products – which is to say capital efficient for insurers facing low interest rates.

Structured variable annuities don’t come with living benefit guarantees and therefore don’t require the same level of reserves as traditional variable annuities, which is why company executives consider them efficient.

“You have subsets of products doing well out there,” said Todd Giesing, director, Annuity Research, with LIMRA Secure Retirement Institute. “The structured ones are doing very well and few companies are driving growth.”

Brighthouse Financial, distributor of Shield Level Selector; Allianz Life, distributor of Index Advantage; and Axa, distributor of Structured Capital Strategies; made up the three major insurers selling these hybrid variable annuities.

Members Life Insurance Company, which distributes its Members Horizon hybrid variable annuity through CUNA Mutual Group, is also active in this market.